Wednesday, October 27, 2010

Dollar Firming After G20 Failure Signals Market Reversal

G20 was a dud. The US went to the G20 to try to avoid a competitive devaluation of currencies yet redress trade imbalances, and got pushback from the Germans, among about everyone else, for hypocrisy, given how QE2 will act as a large currency devaluation regardless of jawboning about trade imbalances. When we faced a mercantilist threat from Japan in the '80, the US was able to coordinate a halving of the Dollar's value with cooperation from Germany among other trading partners. Not this time.

While the initial reaction was that this meant a continuation of the trend since late August - Dollar down, everything else priced in Dollars up - a series of reversals began late Monday. The Dollar appears to have caught a bottom. I posted on the same theme a week ago, but the break of the Dollar at that time looked like a short squeeze, and after a sharp spike, fell back into the trading range since late Sept. That marked it as a False Break, which under Fractal Finance puts us into a wait-and-see mode for the next move.

Some pundits such as the STU expected the Dollar Index to continue down, retesting and even breaking its recent low (76.14), but a funny thing happened on the way to the retest: the G20 failure. The Dollar Index bottomed above the recent low, and has now run fairly well up above 78, approaching the 78.36 level of that short squeeze false break. If it breaks above, the STU believes it pretty well confirms the Dollar has bottomed.

It may be a bit premature to jump to that conclusion, given the uncertainty surrounding both the mid-terms and the Nov3 Fed QE2 pronouncement. David Petch does an in depth technical analysis of the USD, and in contrast with the STU thinks we have a fake out rally for several weeks and then continue down. His chart shows his wave count and the recent trading rnage of the Dollar Index around 77:

To add a third pundit, Neely expects a several-week Dollar rally and Euro weakness, but not a change in the Dismal Dollar trend. And to add a fourth, here is a longer-term Dollar chart as of last week, which this commentator took as bullish:

Besides the Dollar, however, we have other reversals, starting with a (momentary?) end of the slide in bond yields. This has impacted the possible Dollar bottom; or is correlated to it. A few weeks ago the differential between rates in Euroland and the US were favorable to the Euro, but the gap is closing. The market may be expecting the ECB to monetize in order to prevent a slowdown, or perhaps has priced in any expected ECB rate increase. In either case, the Euro rise against the Dollar has reversed for the moment.

PIMCOs argument is based on QE causing inflation. Not clear it will, as I explored in my prior post; and as noted above, Goldman thinks at least $4T would be required to spur a 2% inflation. Yet an indicator of future inflation gave a stunning signal this week: the inflation-protected TIPS bonds went to a negative interest rate for the first time:

At first glance paying a negative rate may strike you as dumb, but TIPS are instruments which gain in principal depending on the CPI (see table). They can make up for a negative interest with an increase in principal. The spread between the TIPS and the Treasury of same length is the inflationary expectation. Currently the negative rate of -0.55% means the bond market is expecting 2% inflation - spot on the stated intent of the Fed.

The five-year TIPS had briefly gone negative in August, and has been trending around zero since mid-September, but this dip to 55 bp under raises an interesting risk for investors: if the economy remains weak and inflation does not re-emerge, you will end up paying the government to hold its bond. Given how uncertain are both QE2 and its impact on inflation, this seems like a poor bet.

PragCap makes an even bolder argument: that QE is DOA already, even before it has been launched. The 10-yr Treasury has only moved 34 bp since the QE2 was first rumored back in early August. Since Bernanke's Jackson Hole speech at the end of August, rates haven't moved!

The implication is really nasty: QE2 would inflate commodities, meaning the inputs to production, but not cause inflation in prices, the output. Instead of restarting production, it will force it into margin compression. We also saw this in the Great Depression. Rather than helping get us out of the mess, it will push us in even deeper.

Comments

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Hey Yel,
"The implication is really nasty: QE2 would inflate commodities, meaning the inputs to production, but not cause inflation in prices, the output. Instead of restarting production, it will force it into margin compression. We also saw this in the Great Depression. Rather than helping get us out of the mess, it will push us in even deeper. "

dont forget to garnish that Fed pie with the mint sprig of higher taxes.

Remember parabolic crude? did anybody at the Fed notice that we DID NOT get horrid inflation seen in the 70's? Was there a message there? Like commods have lost their 'pass-through' feeling.

wave, sometimes losing is winning. four years of Jerry and the D's won’t be able to hide. Imagine the fate of the R's today if McCain had won. D's would run against "Hoover II" for the next 30 years.

In many ways Jerry is the very model of a modern Calif governer. He was the one who sold Calif that they could have it all and make no hard decisions. The feel-good politician. Almost every had trend started with Jerry: the tax revolt, Prop 13, the legalization of public worker unions, the destructyion of Calif schools, the Era of Limits and the end of his father's pro-growth policies, the environmental reguilations that pushed most heavy industry out of the state.

"So much for all those bulls-turned-bears who have been pounding on the table saying that the market would drop soon.

So much for all those who claims that S&P1130 is coming.

So much for those who said that Pretcher turning bullish means market going down.

How come DOW dropped 100 yesterday and came back within just 40 pt below?"

Prechter can do whatever he wants to. after the Aug bottom s&p500 is in the zz with a terminal c-wave. the top is not too far. i doubt that the rally will even touch 1209 level. the drop is gonna start within 11 trading days. After going down to 1121 level s&p will begin to form a bottom.

The s&p closed today down about $2 from where it closed on the 18th - so those looking for a 2-5 day drop have been frustrated but are probably close to break even for the trade.

Some of us have systems we follow, no axe to grind against the market just set-ups based on correlation with prior market action , occasionally the signals fail or perhaps they are misinterpreted but as long as the majority of them keep working I'll be just fine.

We'll see if it continues to hold through the end of the week and beyond, but if this week turns out to be a meaningful high, I'll have nailed it again, just like I did at the February low, the April high, the May/June low, the call for a trading range over the summer and the late August low. And I will have done so without screaming from the rooftops about "the top is in" for weeks on end. Not sure why you guys don't just listen to me, since if this ends up happening, it'll be almost a year since I got a major turn wrong and I always call them in just about real-time with one post, so no broken clock syndrome. When it comes to predicting the market, less is more and I'd rather focus on making one good prediction every few months than a bunch of predictions daily or weekly.

I actually think that now that I don't use wave counts directly for trading, I'm better at counting waves. Kind of odd, but in some way it makes sense, since my trading results don't depend on my wave counts, so I can be more detached about wave structure. It also helps that I never count anything as a :5, so I don't get suckered into playing the "5 waves down!" or "Looks like the end of .5 of V of [v] of 5 up!" game. Ugh, man, what a way to drive yourself nuts. And, while I do get frustrated at times thinking about how terrible the debt mess is, I never trade on news, just charts.

Seriously DG, Vipul et al : Wave Theory is fatally flawed until we can sort out what a 5 is...and what a 3 is...till then it is a fascinating even a mesmerizing construct but of little practical utility on a consistent percentage basis...If what is a 5 is beauty in the eyes of the beholder I am afraid thats not good enough

Read Chapter 5 of Mastering Elliott Wave and that will tell you what the difference between a 5 and a 3 are. Then, apply those rules in real-time and you will be able to distinguish 5s and 3s. I must have said this more than a dozen times on this site over the past two years, yet, no one seems to bother doing it. If you're going to say that something is the "fatal flaw" of a market analysis methodology, don't you at least have some obligation to investigate whether or not that flaw has been addressed by one of the practitioners of that method? That just seems like basic evenhandedness.

You want to talk percentages? 100% of the time when someone has posted a wave count here which identified what they considered a 5-wave move, I have said that it was not a 5-wave move and 100% of the time, I was right about that, as subsequent market action showed. There have been NO 5-wave moves of significance over the past two years. At best, a Zigzag with A & C being 5-wavers, lasting a couple of days. I keep half-hourly and hourly charts by hand every day and none of those more detailed charts meet the Impulse rules specified by Neely. I am open to the idea that there are other rules out there, but no one has come forward with a better set than Neely's, so I see no reason to abandon them when they've worked for me with 100% accuracy in identifying what ISN'T a 5.

So, there is no "eye of the beholder" in my interpretation of what is and is not a 5. If it doesn't meet the rules, I say it's not a 5. I have seen dozens upon dozens of moves called 5-wave moves and not one of them has met the rules and I have said so, in advance of the market proving me correct.

The problem is that most people are not disciplined enough to apply the rules consistently and they allow their bias to override the rules. That's not my problem.

I actually agree with your premise that distinguishing between 5 and 3 wave structures is the most important distinction in the whole theory, I just disagree that the proper method for distinguishing them hasn't been found. It's right there, if you will just read the chapter I specified. I don't think I can make it any clearer than that.

DG, What do think of Petch joining a complex wave (1st phase) with an x wave to another corrective (2nd phase) wave. An x wave should join two standard corrective waves to each other, correct? Question, do you ever do that? Thanks in advance, your answers are always appreciated. BTW, congrats on your calls. I admit I haven't been following all of them but then I got my nose in the HUI index.

Exclusive: 4 Dealers Respond With "$1+ Trillion" To Fed Reverse Inquiry Into How Much QE2 Is Necessary

Yesterday we made a big stink over the Fed's reverse inquiry into the PD community over how much QE2 it should launch. Today, we find out what the distribution is: as Merrill's Harley Bassman points out: "Four dealers are predicting a $1+ Trillion buy program." It is good to finally know what the bogey is.

DG and everyone - I agree wigth DG and encourage every reader to check out Neely's MEW. DG is spot on about how Neely has put more precision into ewave, and chapter 5 is a good place to start. While Neely's ch 3 is daunting, ch 5 is straightforward.

The most useful rule is the rule of extension, where one wave MUST be 1.6x the next longest. (There are two exceptions, both rare.) Consider those ewavers who clam the Hope Rally is impulsive - show me the wave which extended:
wave 1 went from 667 to 956 or 289 ptswave 3 went from 869 to 1150 or 281 ptswave 5 went from 1045 to 1220 or 175 pts

The next most important rule is the rule of alternation. Alternation can be across five dimensions: distance, time, percent retrace, intricacy, type (flat or sharp). Show me where waves 2 and 4 alternated in the Hope Rally:
wave 2 went from 956 to 869 in a 4 week simple zigzag that retraced 30%wave 4 went from 1150 to 1045 in a 3 week simple zigzag that retraced 38%

Possibly one could take a position that wave 2 started in mid-May and traced a flat, but that too has a problem in that the C wave broke as a zigzag not a "5", so that reconstruction fails.

Apply both of these rules to the Hope Rally and you are are left with a classic example of five waves that (a) do not alternate 2 and 4 nor (b) show an extension. Most likely it is a triple correction with two X waves in between. The good news is extended corrections end after 3. The bad news for orthodox ewave is we may still be in the third corrective structure; but this is actually good news for traders as it means we are nearing the end.

My prediction is the SP500 increases in volatility up to the QE2 announcement but will not make new highs, then plunges on the news. The USD must drop low enough first to form a reverse h&s and to retest the support trendline drawn from aug 2008 bottom to nov 2009.
Also what is helpful is the SP500 is pushing up against the 200 week average. It couldn't push above it in April.
Add to that, traders sitting on large gains will not want to hold onto them into the next tax year and face the larger capital gains tax increase.
The weakness of the US dollar will resume next year.

DG, What do think of Petch joining a complex wave (1st phase) with an x wave to another corrective (2nd phase) wave. An x wave should join two standard corrective waves to each other, correct? Question, do you ever do that?

Yes, two Standard Corrective structures, although it seems that Neely leaves room for the x-wave to itself be a Non-Standard structure.

In the scenario you describe above, I would say the best thing to do is wait for more market action to unfold and then see if the interpretation changes. I'd have to see the chart to see if there's a good alternative right now, but I would guess that either some kind of NeoWave-only Triangle, Diametric or Symmetrical is forming and this person doesn't have knowledge of those formations, so is interpreting it differently.

I have seen you gradually moving toward agreement with my views on the absence of Impulse waves, so it's good to see you've taken a firm stance, although this might not make you the most popular EWI affiliate down in Georgia!

I would urge anyone reading MEW to skip chapter 3 the first time around, but chapter 5 has saved me more money on bad wave counts than any other chapter in the book.

After we failed to resume the bear market in February, I started to view the most likely scenario as a Triple Correction. The first x-wave was in July 2009 and the second was the decline in January/February 2010. I'm somewhat wary of the time relationships between the waves in that scenario, but it's a good scenario in many respects. The only thing I'd add to your description is that if that is the right structure, a Triple Correction should not get fully retraced, meaning we have seen the lows. The rationale for why is explained in chapter 10 of MEW, another chapter which has saved me much grief in putting together logical wave counts in which one pattern flows into the next with at least some rational connection between the "mass psychology" of the 1st and 2nd patterns.

It was a typical BEAR raid given the 3.2 million shares that have been sold short (with 2.5 million short under $5.00).

Not a problem.
The Validation Study was impressive.
I added to my position.

If you are actually interested in learning more about this incredible Company and management team, you can read about the Validation Study in the Science Section of today's NY Times by Nicholas Wade, or you can take a look at the following weblink from yesterday's presentation and news conference, which included Dr. David Ahlquist of the Mayo Clinic and Graham Lidgard, senior research scientist for Exact Sciences:

Keep in mind, that the 64% number for PRE-CANCER sensitivity is a "game-changer". The 85% for colorectal cancer detection is pretty close to that of Colonoscopy, of which only 2 million are performed each year. Colonoscopy was never intended to be used for general population screening. But this NON-INVASIVE stool DNA test (recommended every 3 years at a cost of $300) is. I believe that it will replace the 12 million FOBT/FIT tests taken annually, which do nothing other than detect blood in your stool. If you have blood in your stool, you are already in Stage 3 or 4. Stage 4 only has an expected survival rate of 8%.

I bought more shares (in size) in the after-hours yesterday from $6.95 down to $6.45

This is a GIFT.

The market cap is still at only $287 million. Pretty miniscule given the potential here, and the millions of people in this Country over the age of 50 that go unscreened for CRC. Meanwhile, CRC costs this country $14 BILLION per year and their are 142,000 NEW cases of CRC each year.

While the SPX is rangebound in the doldrums, here's the 15-year SPX chart once again. Good news for the bulls: the current consolidation is occuring just after a break above the downtrendline joining the Oct07-May10 tops. Good news for the bears: The decade old parallel channel line resistance(red line) is just above around 1210, followed by 1220 horizontal resistance.

With the weekly RSI overbought & dollar finding support as well, it would probably be prudent for bulls to take profits at this point, and wait for a positive break above 1220, before initiating fresh positions.

Since you're looking for feedback, that count has major time and logic problems. Wave-2, which follows the Extended wave of your Impulse structure, is far too short in time to be "real". After the extended wave, the market needs time to consolidate the gains (or losses), so the Corrective wave which follows must be at least equal in time. In fact, most Impulse wave counts can be dismissed almost immediately, if wave-2 isn't at least as long in time (or close) as wave-1, even if you don't necessarily think wave-1 will be the Extended wave. Doing this one simple thing will keep you from wasting time waiting for the elusive "wave-3", if waves "1" & "2" don't exhibit the proper time relationships. When "wave-2" is much shorter in time than "wave-1", chances are it's an x-wave in actuality, although sometimes B-waves can take little time in relation to the A-waves preceding them, provided the B-wave retraces little of the A-wave.

Wave-4 then shows signs of significant strength, being a Running Correction, but is then followed by the shortest of the 3 "trending" waves of the pattern. The trending wave which follows a Running Correction should be the Extended wave of the Impulse, not the shortest. The market builds up a significant amount of strength (or weakness) in the direction of the large wave of the Running Correction and then the trending wave which follows should reflect that.